The Big Spend: CMG Financial Starts Revving A New Engine

Seth Sprague says the industry now is spending a lot of time “focusing its efforts to try to keep borrowers engaged.” As director of mortgage banking consulting services for Richey May, the mortgage industry-specific tax audit and advising firm, Sprague has observed how innovation in servicing has lagged innovation in other aspects of the mortgage process. “It’s that disengaged borrower that really leaves a lot of losses for everybody.”

Engagement and empowerment aren’t exactly the same, though. Can servicing transcend making and taking payments, revising a loan balance, and dealing with crises? Should it, even?

“I’m the proverbial guy that flunked his way out of high school and didn’t go to college and started as a loan officer and worked his way up,” says Chris George, founder, CEO, and private owner of CMG, who over the past year has invested in building a de novo, in-house servicing platform that centers rather than marginalizes the borrower experience. He aims to inside-out the commoditization of collecting payments by reinvigorating the borrower-servicer relationship.

It’s difficult work, pioneering work, and expensive work — very expensive work. George won’t divulge the expense. That’s also beside the point. “We’re pretty close to getting there,” he confirms. “We see this as a pivotal point in our company’s legacy.”

In 2019, CMG originated roughly $6.5 billion in loan volume. Production swelled to nearly $14 billion in 2021, before receding to $9.5 billion in 2022. In 2023, the worst year of existing home sales since George founded CMG in 1993, the company boosted 2022’s production by 45%, closing nearly $14 billion worth of mortgages once again. Through the first half of 2024, CMG was on track to match or surpass last year’s production.

While CMG has never serviced its own assets, now it can do so profitably due to its growing market share. George’s freedom as a private owner to make investments in servicing innovation “could be a market differentiator really from a servicing perspective,” says Thompson. More so, George has spent big on CMG’s freedom to control its destiny — and its borrowers’ destinies.

Experts say it requires 200,000-300,000 units to make any money on in-house servicing. “You really need to understand what you’re getting into, and it does take cash,” says Sprague. “Servicing isn’t a hobby.”

“When you look at technical innovation, we’re kind of on a growth of our maturity curve,” says Paul Akinmade, the company’s chief strategy officer, who entered the industry in 2004 as an originator. “You look at the G-Rates, the Freedoms, the loanDepots, the Quickens of the world, they’re established. The challenge with that is they’ve already built their battleships.”

So, CMG assessed the shortcomings of others’ “battleships” and decided to build something novel — an engine that unifies the application, origination, and servicing experience for borrowers and their loan officers. “If I see something that they’re doing at one company and somebody else is doing at another company,” he continues, “I can detect the imagination of all the best practices that are being done in the industry and consolidate them.”

An 18-month project, the platform should have loans flowing through it by early 2025, pending approvals from regulators. While CMG does not have plans to become a major player in the sub-servicing market, Thompson acknowledges that the company could sub-service for a similarly situated partner that sees the value of their platform and economic model.

Ultimately, allowing borrowers to be more nimble in the market enables CMG to be more nimble, too. By reorienting servicing operations around the customer journey, not just a payment schedule, CMG hopes to make the back office of servicing the new front office for originating. Industry-wide loan production in 2024 has mirrored 2023, which serves the interests of CMG, helping them capture market share.

“We’ve been waiting for this market,” George says. “I’ve been waiting for rates to go up.” The difficulty of the endeavor makes it worthwhile. He continues, “The challenge of doing hard work is what we’re all about with this process because we think that’s an interesting barrier of entry for all the rest of the competition. It gives us a definitive, distinctive advantage.”

Pioneers Get Shot, Settlers Get Rich

Innovating in a highly regulated industry is capital intensive, making return on investment (ROI) the usual guiding principle for such investments. CMG is different, however. While ROI is eagerly anticipated, George has loans on his books with notes in the low twos and high ones from COVID-era originations.

“I don’t think those loans are ever paying off,” says George, whose four sons work at the company. “You want to keep that thing until payment 360.” That’s a 30-year relationship. “One of my boys is going to be accepting the last payment for a loan that I made back in 2020, 2021.”

The additional business a satisfied borrower provides through future referrals is typically unquantifiable. It is similarly difficult to quantify how much future business is lost from a dissatisfied borrower. The return on CMG’s investment, which includes rewiring much of the company’s operations, has no specific timeline, as opening a new branch location might.

Rather, the “intangible returns that the service of servicing brings to us” would be worth an eight-year wait if it takes that long to break even. The investment in a de novo servicing platform will result in winning and retaining more customers, George believes, while preparing the company for future demographic and technological shifts in the industry.

“Pioneers get shot and settlers get rich,” he quips. “I kind of like to think that we’re pioneering products and we’re not dying along the way. We’re bringing to light ideas that we think are good for the consumer.” Those ideas are similarly beneficial for CMG, which has grown market share in an elevated-rate environment. George attributes that down-market success to the idea that “every single person’s hand on the wheel is to serve the customer.”

Instead of forcing consumers to stoop to the servicing industry’s limited capacity, CMG would rise to the rapidly evolving expectations of consumers, who would prefer to spend more effort understanding the transaction and less effort searching for the components of the transaction.

“The consumer today is actively concerned about how their loan is serviced and how well they are treated in that process,” George explains, “and want the kind of connectivity and the kind of access that they had when they were being taken care of during the origination process.”

Where the closing and selling of a loan would typically end the relationship between borrowers and loan officers, CMG’s new platform makes a borrower’s loan officer their primary point of contact through the servicing of the loan. “The idea is that we want you to be able to communicate with the person that you built trust with, and we want you to be able to do these things without having to talk to a completely different stranger,” he reasons.

The core of this platform is a homeowner marketplace that pools data currently held across disparate systems to situate borrowers mortgages within a more nuanced accounting of their financial lives. A borrower can access the homeowner marketplace to check the status of a loan, the value of their home, or changes in rates. Maybe that borrower wants to replace expensive appliances, build an addition, shop insurance or utility rates, or buy a second home.

Myriad touchpoints in one location provide visibility, convenience, and optionality, empowering borrowers to take ownership of their home loans — not just pay their bills before the due date. Homeownership is the cornerstone of average consumers’ ability to generate long-term wealth. Monthly mortgage payments are most consumers’ largest expense, affecting the food they feed their children, if they vacation, even from which streaming services they need to unsubscribe.

Bringing borrowers into the lived life of their mortgage should be table stakes in 2024, especially as affordability wanes and the average age of first-time homebuyers increases. According to the National Association of Realtors (NAR), the median age of a first-time homebuyer in 2023 was 35, up from 31 in 2013 and 29 in 1981. For many of these buyers, a mortgage fits into a financial strategy already in place, rather than serving as the first step.

George asserts, “It is a substantially different way to look at loan servicing today, that really is putting the word ‘service’ back into loan servicing and the ability for borrowers to be able to see the added value of why they selected a particular company to do their mortgage.”

Legacy Tech Breeds Legacy Problems

Most regulations in mortgage servicing are designed around the technologies available to facilitate compliance. Because laws are generally static, but technology constantly evolves, and by evolving reshapes consumer demands, regulations fail to evolve with emerging technologies and shifting demand, poisoning the well of innovation with cost and compliance burdens.

The complicated nature of these laws requires companies to juggle federal, state, and investor-insurer rules and regulations simultaneously. “There’s localized treatment of things that should in 2024 probably have a federal standard,” Thompson says. Yet, much of what binds servicers to some kind of standardization and transparency didn’t even exist until a decade ago.

Michael Waldron, founding partner of Gate House Compliance, a mortgage advisory firm, and president of Compliability Solutions, says the servicing industry has improved its focus on customers since the passage of the Dodd-Frank Act in 2014 — data is used more strategically, for instance, by contacting borrowers at preferred times and in preferred languages. However, he acknowledges that reliance on outdated technology hinders the progress servicers can make toward modernization.

“Regardless of how good the technologies are, we still have an industry that is laden with disparate systems,” says Waldron, who previously led the integration of a speciality servicing platform when he worked at Mr. Cooper Group. “That’s an issue that the industry has been fully aware of, and quite frankly, very focused on, particularly in the last five to seven years.”

The patchwork of technologies and regulations created in the years following the 2007-2008 mortgage crisis is fragmented and arcane. New avenues for loss mitigation arose from the Dodd-Frank Act, along with RESPA regulations. But, compliance with new regulations required servicers to develop new capabilities grounded in technology more than half-a-century old.

The idea of adding effective customer service is laughable, says Thompson. “That type of customer service in the context of servicing does not exist, and there’s a lot of reasons for that,” she explains, “including the fact that servicing is running on 60-year-old infrastructure.”

In the aftermath of the mortgage crisis, Thompson was one of 16 independent consultants selected by the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board (FRB) to manage one of the legal teams conducting reviews of the deficient servicing and foreclosure practices of 14 mortgage servicers subject to the OCC and FRB’s Independent Foreclosure Review. This effort became a referendum on the future of mortgage servicing laws.

After her work with regulators, Thompson led Flagstar Bank’s default mortgage operations team for nearly a decade, heading up its mortgage-specific fintech accelerator program, too. In 2021, she launched Consigliera, a servicing-oriented organization connecting financial institutions and the fintech community. The depth and breadth of Thompson’s expertise in high-risk solution management, operations, innovation, and development is difficult to overstate.

Such experiences, though, have shaped her understanding that legacy technology impedes the modernization of legacy regulations, impeding innovation in a vicious cycle that harms people — and not just borrowers, but whoever’s on the receiving end of an irritated borrower’s phone rant.

“It’s the root cause of why the servicing industry sucks so bad,” Thompson insists. “These are blue-collar jobs. We pay people $55,000 a year to support their family and work in operations, which is a gajillion hours a week, with 60-year-old technology, and we ask them, ‘Why can’t you do it faster?’”

In her role as a quasi-regulator with the Independent Foreclosure Review, Thompson used to be that person demanding new tricks from an old dog — soundness from a tech stack pieced together with spit and glue.

“‘What the hell’s wrong with you servicers? Why can’t you do this? Why can’t you do that?’” she recounts. “The reason why I stay in this industry is because of the people, and I mean the people that don’t understand the asset that is homeownership, and all these people on the inside — and maybe more so them — that are fighting to help those consumers.”

Despite improvements, experts agree that the industry needs to take big steps forward. This happens with “the help and partnership of the regulatory community to allow for the advancements of technology to service the customers in the manner in which they want to be serviced, and to still do so compliantly,” Waldron believes.

Dancing On The Infrastructure Problem

As artificial intelligence (AI) rapidly advances and the impacts of escalating climate change wreak havoc on communities across the U.S., the servicing industry is trying to catch up at a time when it should be trying to get ahead. The industry can manage 2-4% delinquency rates, but high delinquency rates during the Great Recession were a warning sign, as were the rates caused by catastrophic natural disasters in 2017 and 2018 and the COVID-19 pandemic.

While the infrastructure to handle such events exists, the servicing industry’s ability to improve borrower engagement directly affects its success in mitigating losses when such events occur.

“If a massive tornado rips through the entire country and hits a bunch of big cities, we got a lot of problems,” says Richey May’s Sprague. “I’m not sure that’s something we could ever plan for. But, we got through COVID. I kind of give the servicing industry a lot of credit for being able to do well by the borrowers, do well by the bond holders.”

As founding technologies grow increasingly outdated and the patches for adding new functionalities become more tenuous, the threshold at which a massive delinquency event could overwhelm the system drops. The crux of this dilemma is what Thompson calls the “infrastructure problem,” a data sharing-capacity failure compounded by the systems it supports.

Meanwhile, much consolidation has occurred in the servicing industry over the past few years. In late July, Mr. Cooper Group announced plans to purchase the servicing operations of Flagstar Bank, one of the largest residential mortgage servicers in the U.S. Expected to close in the fourth quarter of 2024, that transaction would boost Mr. Cooper’s servicing portfolio to more than $1.5 trillion, exceeding 12% of the $12.44 trillion of outstanding U.S. residential mortgage debt.

Climate change presents a looming systemic risk to the entire housing system. The escalating impacts of extreme weather have already severely disrupted the affordability and availability of homeowners insurance in major housing markets like California and Florida. Mortgage servicers are and will continue to be the front line of that crisis, directly engaging with affected borrowers.

“When that reaches critical mass, the ecosystem will be tested,” Thompson warns. “There’s a tipping point where these things can’t be supported anymore. These ecosystems that are running the American financial system, to replace them is essentially replacing your operation, which is why it’s that expensive and that hard.” To solve a small piece of the infrastructure problem is only to fragment the system further. The whole thing needs rethinking.

Imagine a human hand. With legacy servicing platforms, the core financial technology — the part that takes and makes payments — is the palm. Technologies for processes like foreclosure, bankruptcy, invoice management, and customer communications all attach to that palm, like fingers. Removing the financial core would isolate those pieces, causing the system to collapse.

Legacy systems can only be retrofitted, which becomes financially and technologically prohibitive. A longstanding reliance on the financial core has weakened the entire industry’s resilience to system shocks.

But, technology companies’ ability to innovate is always tied to the client willing to pay for the innovation sought. “The price is too big unless you are one of the biggest guys,” Thompson adds. “The macro economics of innovation in servicing is one of the core reasons why I decided to go back to the operations side.” Building a de novo platform while bringing servicing in-house thrusts CMG into the future

Not too long ago, what kept Akinmade awake at night was fear that an Amazon-type company would decide to try mortgages. “The reason for it is our technology is so fragmented and so legacy and so archaic that we are poised to be disrupted.” Four years ago, he took over CMG’s technology strategy and began building an engineering arm with the aim of unifying the disparate aspects of the borrower journey: pre-application, application to funding, and servicing.

“It’s really, really critical to understand the data and technology infrastructure in servicing to understand why servicers are often so limited in terms of how they can connect with people,” Thompson says. “I will dance on the infrastructure problem until I solve it or I’m not in the industry anymore because I quit, and just say, ‘I give up! You people! We can’t fix this problem!’”

Making Data The Modern Gooey Center

When a mortgage bank wants to bring servicing in-house, three-ish options exist. Option one is acquiring another lender that self-services and retrofitting the system. Option two is buying a suite of products offered by one of the two dominant providers in the marketplace, Black Knight and Sagent, then filling in the gaps with other providers.

Costs for these options are increasingly inflated as the founding technologies grow outdated.

A mortgage bank’s third option for bringing servicing in-house is building something novel. George hired Thompson and her team to build a bespoke servicing platform for a customer of one. Addressing “the infrastructure problem” meant re-orienting the relationship between CMG and its customers. Solving for “human connectivity” meant embedding, not affixing, borrowers.

Imagine another human hand. For the palm, Thompson’s team has developed a data warehouse — a data layer that translates into a single integrated location from the beginning of the servicing operation. Instead of 40 touchpoints, CMG’s platform integrates five or six primary technologies through the data layer, which acts like a switchboard for the end-to-end system.

“We’re rejecting the use of the financial core as the cornerstone of our ecosystem, having data be our cornerstone because it’s 2024,” Thompson says. Not tying CMG’s entire servicing operation to the financial core makes the platform more pliable, seamless. It’s database-driven, and being so, ouroborates the head and tail of origination and servicing, the mortgage life cycle.

What Thompson’s team is building may be for a client of one, but not an industry of one. “We’re not even trying to customize things with the providers we’re working with,” she explains. “We’re sincerely hopeful that those providers we’re working with can re-commoditize what we’re building with them so that somebody else can use it, too. That’s the only way to orchestrate change in these types of industries.”

Say a worried borrower with $30,000 of revolving debt, a 720 FICO score, and a gigantic, looming tax payment, calls in to discuss an escrow assessment. That revolving debt typically would be invisible to the borrower’s point of contact. The option of a HELOC to reconcile the revolving debt and escrow shortfall becomes readily apparent, instead of a lump sum payment that the borrower can’t afford or an increase in principal and interest for the next 12 months.

In this scenario, CMG can solve a problem for the borrower before it becomes a problem, monetize a transaction that can fund the technology, and create a better customer experience, without a net gain on cost — and even with potential net reductions on cost. From a business standpoint, that ought to fund a white glove, concierge servicing experience.

Thompson is unaware of any other large financial services companies that have a “modern gooey center that is completely driven off of data.” Some are getting close, though. “The reason we’re doing that is because we want to give ourselves the best chance to survive,” she says. When better technology comes along, they can “flip out” that data core of the ecosystem.

“You’re going to get smacked in the face with branches,” adds Akinmade, likening their task to navigating through a jungle. “You got a dull machete. You got to walk for miles. It’s not forgiving. It’s not for the faint of heart and you’re going to get sick along the way. But, if you get to the end, you will have charted a new path.”